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Reuters news reported on Monday that, “U.S. farm groups have issued a stern warning to President George W. Bush, cautioning him against accepting a deal in world trade talks that would slash subsidies without sufficiently unlocking new markets…A dozen industry groups, including the American Farm Bureau Federation, the largest U.S. farm group, told Bush in an Oct. 5 letter that they were ‘deeply concerned’ by the state of negotiations in the World Trade Organization’s Doha round.”

I. Farm Bill Philosophy- Domestic Focus
Alan Beattie reported yesterday at The Financial Times Online that, “The effects of the farm bill are felt well beyond the borders of the US, largely in lower prices for subsidised basic commodities such as rice, corn and cotton that might benefit consumers but undercut farmers in other countries, particularly in the developing world.

(Right, a recent USDA report noted that, “Most [ethanol] plants are beneficially placed insofar as creating jobs and income in areas that have been unable to retain their population.”)

“But the drafters of the farm bill say they are not working with the US’s international obligations – particularly those to the troubled ‘Doha round’ of global trade talks – primarily in mind.

“The precise mapping from the proposed version of the farm bill to the US’s current offer to restrict farm subsidies in Doha is not clear cut, not least because there are disagreements about how certain subsidies should be classified under World Trade Organisation rules. But J.B. Penn, former deputy secretary of agriculture and now chief economist at John Deere, the farm machinery manufacturer, says: ‘If there is a deal in Doha they will have to restructure the farm bill as passed by the House. The programmes just don’t fit inside the subsidy limits that are being talked about.’”

Mr. Beattie also stated that, “Susan Schwab, US trade representative, says that the farm bill can be rewritten later if necessary. ‘This farm bill is not our Doha round offer,’ she says. ‘It never will be. Our negotiating partners need to understand that.’

“But most officials and lobbyists think offering US farmers more now makes it harder to get a deal. Mary Kay Thatcher, farm policy specialist at the American Farm Bureau, says: ‘If you were writing a farm bill to help advance the Doha round, it wouldn’t look like this. But when you have Doha stalling as it has been, there is very little enthusiasm in Congress for going out of their way to help it. Congress has pretty much discounted Doha.’

“In theory the US farm programmes could be unpicked by a wave of litigation in the WTO, just as reform was forced on its cotton programme in a case brought by Brazil. Canada has already brought a case against US corn subsidies and Brazil is threatening actions over rice, wheat and ethanol. But as Scott Andersen – who, as a partner at the law firm Sidley Austin in Geneva, led Brazil’s cotton case – told a seminar recently, prices of commodities such as rice are so high at the moment that it could be hard for affected countries to show their farmers have actually been hurt.”

A Reuters news article from Monday (via DTN, link requires subscription) reported that, “U.S. farm groups have issued a stern warning to President George W. Bush, cautioning him against accepting a deal in world trade talks that would slash subsidies without sufficiently unlocking new markets.

“A dozen industry groups, including the American Farm Bureau Federation, the largest U.S. farm group, told Bush in an Oct. 5 letter that they were ‘deeply concerned’ by the state of negotiations in the World Trade Organization’s Doha round.

“Even groups generally supportive of new trade deals have been incensed by a recent proposal, put forward in July by Crawford Falconer, the chair of World Trade Organization agriculture negotiations, that would cap U.S. trade-distorting subsidies as low as $13 billion a year.”

The Reuters article also stated that, “Farm groups complain that Falconer’s framework spells out deep reductions to U.S. farm subsidies, a banner issue among developing countries who believe the supports make for unfair competition on world markets, without providing enough reductions for other nations’ tariffs in return.”
II. Food Prices and Related Issues

A variety of recent news items have focused on issues associated with food prices. Topics such as commodity production and market prices, ethanol production, and energy costs have been highlighted recently.

Many of these issues were discussed on The Diane Rehm Radio Show last Tuesday where a panel of guests including, Bruce Babcock (professor of economics and the director of the Center for Agricultural and Rural Development at Iowa State University), Dan Morgan (special correspondent, Washington Post and fellow, German Marshal Fund of the United States) and Lauren Etter (reporter, Wall Street Journal) took “a look at how energy costs, federal subsidies, and a growing middle class worldwide are reducing end of year grain inventories and driving up grocery bills.”

Meanwhile, Associated Press writer Lauren Villagran reported on Monday that, “This morning, your bowl of cereal and milk probably cost you 49 cents. Last year, it was 44 cents. By next year, it could be 56 cents. It’s enough to make you cry in your cornflakes.

“The forces behind the rise in food prices –China’s economic boom, a growing biofuels industry and a weak U.S. dollar –are global and not letting up anytime soon. Grocery receipts are bulging because the raw ingredients, packaging and fuel that go into the price of foodstuffs cost more than they have in decades.

“It’s the worst bout of food inflation since 1990, but not yet worrisome to the economy, said John Lonski, chief economist of Moody’s Investor Service. While high food prices can cut into consumers’ discretionary spending, the 4 percent rate of food inflation is still far below the crippling double-digit levels of the 1970s.”

The AP article added that, “It’s possible to trace the jump in food costs to the commodities markets, where the price of agriculture products and energy have reached multidecade highs this year. Crude oil, which helps dictate the price of gasoline and plastic packaging, hit an all-time peak in September. Wheat prices also climbed to a record.

“The run-up in commodity prices has as much to do with short-term supply and demand in each market as with long-term shifts in who produces and consumes those products.

“China is the juggernaut. Rapid growth there –and in Brazil, Russia, India and other developing nations –has led to massive demand for raw materials, including energy to run factories and cars, metals to build infrastructure and beans and grains to feed livestock and people. China will import almost 50 percent of the world’s oilseeds within a decade, becoming the world’s largest importer, according to estimates from the Organization for Economic Cooperation and Development.”

In addition, the article noted that, “Higher commodity costs have led Kellogg Co., General Mills Inc., Kraft Foods Inc. and others to hike prices this year. Kellogg boosted prices 5 percent in April based on weight; in June, General Mills shrunk cereal package sizes in a way that had the effect of lifting prices. Starbucks Corp. decided to charge more for lattes and other drinks to cover its milk costs.

“‘Ethanol got us started down this line, but other things moved to the forefront,’ said Darrel Good, professor of agricultural economics at the University of Illinois.”

For a look at current future’s prices of some program crops, the Associated Press reported yesterday that, “In the agriculture market, wheat prices plunged the daily limit permitted by the Chicago Board of Trade and held at that low through most of the session while other agriculture futures also declined. December wheat lost the 30-cent maximum to end at $8.60 a bushel, while December corn fell 2.5 cents to $3.3975 a bushel. November soybeans shed 15 cents to settle at $9.255 a bushel.”

Associated Press writer David Mercer reported yesterday that, “The cost of food spiked right on cue last year when economists warned that the country’s thirst for ethanol would drive up the cost of the grain used to feed livestock for meat, dairy and other foods.

“But economists say it isn’t all ethanol’s fault, and warn that Americans have yet to feel the full force of the corn-based fuel additive on food prices.

“‘We have a huge expansion under way,’ Iowa State agricultural economist Robert Wisner said. ‘That will almost certainly tighten grain supplies.’ Feed is one of the largest costs in the livestock and dairy industry, he said.”

Mr. Mercer also noted that, “Ethanol-driven corn demand is one reason, Wisner said, but so is international demand for American livestock and feed. Consumers in prosperous Asian economies are buying more meat than ever before and the weak dollar adds to the effect, making American food more affordable for overseas buyers.

“Wisner and others say food-price increases more directly attributable to ethanol are ahead, though they aren’t sure how big they’ll be. A recent drop in the price of ethanol and fears of a glut have led to a slowdown in new plant construction.

“But corn futures prices suggest traders are still bullish, running between $3.75 and $3.95 a bushel for most of next year and just over $4 for all of 2009.”

With respect to the future use of biofuels, Dow Jones News writer Bernd Radowitz reported on Friday that, “Passenger vehicle transportation is expected to remain dependent on oil for the foreseeable future, but alternative fuels and hybrid car technologies will increase their penetration, a study published Friday by the World Energy Council said.

“‘In 2050, gasoline and diesel are likely to remain the dominant fuels,’ the study on transport technologies and policy scenarios to 2050 said.

“Yet, the biofuel portion of transport fuels will likely also be significant by 2050, the study said.”

The article reported that, “Advanced second-generation biofuels such as biomass-to-liquid and cellulosic ethanol have a potential to reduce greenhouse emissions by 90%, the World Energy Council study said.

“First generation biofuels, such as ethanol from sugar cane and biodiesel, however, are also expected to retain some market share in the long term.”

In the U.S. however, increased use of ethanol may be limited by transportation factors.

DTN writer Todd Neeley reported on Friday (link requires subscription) that, “If the U.S. ethanol industry doubles production capacity within the next year, the nation’s transportation and distribution system may not be ready.

“Experts say about 85 percent of the nation’s 400 to 500 gasoline terminals that blend ethanol are not equipped to take in rail cars of any kind — let alone the 100-car unit trains needed to move larger volumes of ethanol more efficiently.

“What’s more, the ethanol shipped to larger gasoline distribution terminals that can handle unit trains is getting there slowly, most ethanol plants coming on line do not have ethanol storage that could help ease the pressure from what is expected to be slower rail car turnaround times, and many smaller ethanol companies aren’t equipped to load unit trains with ethanol.

“Add to the mix that 75 percent of the nation’s ethanol is moved by rail, and there is potential for serious tie ups as the ethanol industry expands in the coming months,” Mr. Neeley said.

(As Congress debates energy policy and considers the possibility of increasing the Renewable Fuels Mandate, note that an Economic Research Service Report from this month (“Rural America At A Glance, 2007 Edition”) stated that, “Over half of all ethanol plants are located in [nonmetro counties with declining populations].” The report added that, “Seventy percent of the nonmetro ethanol plants in operation are located in counties that declined in population from 2000 to 2006, whereas just half of all nonmetro counties lost population. Thus, most plants are beneficially placed insofar as creating jobs and income in areas that have been unable to retain their population.” (See this graph for more detail)).

News items providing additional detail regarding the underlying supply and demand situation of key commodities have also been issued recently.

On Friday, the Food and Agriculture Organization (FAO) of the United Nations issued a press release, which stated that, “International wheat prices have increased sharply since June, hitting record highs in September in response to tightening world supplies, historically low levels of stocks and sustained demand, according to FAO’s latestCrop Prospects and Food Situation report, issued today.

“The combination of higher export prices and soaring freight rates is pushing up domestic prices of bread and other basic food in importing developing countries, hitting the group of Low-Income Food-Deficit countries (LIFDCs) particularly hard and causing social unrest in some areas, the report said.

“The total cereal import bill of the LIFDCs is forecast to increase considerably for the second consecutive year, reaching an all-time high of US$28 billion in 2007/08, up roughly 14 percent from last year’s already high level. Overall, developing countries are likely to spend a record US$52 billion on cereal imports, according to the report.”

The release indicated that, “Maize prices are also well above last year’s levels, despite the bumper crop materializing this year, mainly reflecting continued strong demand from the biofuel industry, the report said.

“In the United States, the world’s largest producer of maize, output is forecast to increase 26 percent from 2006 to an all-time high. According to the report, record maize harvests are also expected in South America, with production in Brazil increasing by one-quarter from last year’s good level, and in Mexico, the largest producer in Central America.

“‘On current indications, this year’s cereal harvest would only just meet expected utilization levels in the coming year, which means that stocks will not be replenished,’ said Paul Racionzer from FAO’s Global Information and Early Warning System. ‘We anticipate cereal stocks to remain at very low levels for the foreseeable future.’”

In related coverage regarding the FAO report, the Associated Press reported on Friday that, “The world’s poorest countries may have to pay 14 percent more than last year for their cereal imports as wheat prices reach record-high levels, a U.N. agency said Friday.

“The increased bill is a result of decreasing world supplies, historically low levels of stocks and sustained demand, the Rome-based Food and Agriculture Organization said in a report.”

With respect to U.S. corn stocks, Iowa State University Agricultural Economist Robert Wisner reminded readers in the October 1 edition of the Iowa Farm Outlook that, “USDA’s September 29 grain stocks report showed considerably larger corn supplies on hand September 1 than generally anticipated. The larger stocks are a caution sign in projecting corn feed usage and prices for the next few years.”

More specifically, the September 28 Grain Stocks report stated that, “Corn stocks in all positions on September 1, 2007 totaled 1.30 billion bushels.”

Although this was “down 34 percent from September 1, 2006,” the 1.3 billon estimate was significantly higher than the 1.14 billion-corn stocks estimate contained in the latest WASDE report, which was issued on September 12 by the World Agricultural Outlook Board.

Factoring in the potential possibility that this year’s corn crop is larger than the 13.3 billion bushels forecast last month by NASS, at least with respect to corn, supplies may not be as tight as previously considered.

(The latest production projections and use will be updated this Friday when the October WASDE report is released).

And with respect to higher wheat prices, University of Illinois Agricultural Economist Darrel Good noted yesterday that, “Wheat prices moved to all time highs this fall, with December futures at Chicago reaching $9.60. New crop, July 2008 futures, traded to a high near $6.95. Some of the reasons for the extremely high prices were outlined in the September 10, 2007 issue of this newsletter.

“Prices have softened over the past week as the market begins to anticipate some showdown in consumption and that the small 2007 crop has been fully reflected in current price levels. Decisions in the European Union to allow import licenses for 20 million bushels of corn and eight million bushels of sorghum could help ease the tightness in the supplies of feed wheat there. In addition, the recent Canadian estimate of the current crop there was a bit larger than expected. Improved weather in Argentina and ideas that the drought damage to the Australian crop has been fully anticipated by the market also contributed to recent price weakness.

“Prices for the 2008 crop remain well below prices for the 2007 crop as the market anticipates an increase in world wheat acreage in 2008, motivated by the historically high prices. In addition, an increase in acreage in the European Union will be accommodated by the lifting of the 10 percent acreage set-aside requirement. The acreage response to high wheat prices will unfold over a fairly long period of time. Winter wheat producers in the northern hemisphere have the first opportunity to respond to the higher prices as seeding is underway. For example, the USDA reported that 42 percent of the U.S. winter wheat crop had been seeded as of September 30. Seeding now likely exceeds 60 percent. Private sources forecast that soft red winter wheat producers are likely to make the largest percentage increase in acreage due to the combination of high wheat prices and the potential opportunity to double crop some of those acres to high-priced soybeans. This is consistent with the experience of 1996 when wheat prices reached the previous high. Seedings of soft red winter wheat increased by nearly 10.5 percent and area seeded to hard red winter wheat increased by about five percent.”

Concluding, yesterday’s University of Illinois Extension report indicated that, “Wheat prices appear to have peaked, at least for now. Prices may remain generally high, but very volatile as 2008-09 production prospects, both acreage and yield, unfold. The USDA’s Winter Wheat Seedings report, to be released in the second week of January will provide the first indication of how U.S. producers responded to the high prices.”